Nov 23, 2011 (LBO) – Sri Lanka’s rupee devaluation earlier this week was a step in the right direction, and a planned narrower budget deficit would reduce the country debt burden an International Monetary Fund official said. “We think that the exchange rate adjustment was a step in the right direction and should help support Sri Lanka’s export competitiveness and safeguard its reserves over the medium term,” IMF resident representative Koshy Mathai said.
Sri Lanka has lost foreign reserves since peg defence began in mid 2011 and active sterilizations of interventions began in August.
Sri Lanka’s exports grew 38 percent to August but the trade deficit has been high, driven by rising domestic spending power coming from net borrowings abroad and inward remittances from Sri Lankans resident abroad.
In the spot dollar market the rupee fell to 114.15/20 rupees early Wednesday after an official guidance band was dropped 30 cents. The rate was put back at 113.90 later in the day.
The rupee fell more than three percent a day earlier after President Mahinda Rajapaksa said in a budget speech that the currency should be devalued. There has been some uncertainty in both forex and bond markets this week.
The budget planned a deficit of 6.2 percent of gross domestic product.
“Our initial impression is that the budget also seems to be broadly consistent with the authorities’ earlier articulated plans, though we are continuing to study this complex document,” Mathai said.
“The targeted reduction in the deficit, while smaller than originally envisaged, should nonetheless help keep the debt-GDP ratio on a declining path.”
An IMF mission is due in Colombo in January.